Andarko: Buy Growth At A Low Price

Jul.22.14 | About: Anadarko Petroleum (APC)


Anadarko’s onshore assets, particularly the Wattenberg field, are well positioned to ensure bright long-term growth prospects for the company.

The company expects to grow its hydrocarbon sales volume from the Wattenberg field by a CAGR of 20% in the long run.

The company is also well positioned in the Gulf of Mexico.

With the progression of recent projects, the company is expected to deliver increased sales volume.

Anadarko's (NYSE:APC) asset portfolio primarily includes onshore resource plays in the Rocky Mountains region, the southern United States and the Appalachian basin. In addition, the company has been producing and exploring oil in the deep water region of the Gulf of Mexico. The company had proven reserves of almost 2.8 billion barrels of oil equivalent. Going forward, the company is expected to increase its production by a CAGR of around 6% with Wattenberg assets leading the way.

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Source: Investor Presentation

Wattenberg Field to Lead the Volume Growth

Anadarko operates more than 5,200 wells in the liquid-rich Wattenberg field. The company's drilling program in the field has been entirely focused on horizontal development. During last year, the company drilled 335 horizontal wells, reflecting an increase of 21% y-o-y in sales volume from the field. The company has also identified approximately 4,000 potential drilling locations in the Niobrara and Codell formations of the Wattenberg field which are expected to provide substantial opportunity for continued activity. For 2014, the company plans to employ as many as 13 horizontal operated rigs on an average drill over 360 horizontal wells in the field.

During the first quarter of 2014, Anadarko's crude oil sales volume from the Wattenberg field also grew by 7,000 barrels per day compared to the previous quarter. This made up approximately 50% of the total quarter-on-quarter crude oil sales volume growth from the company's U.S. onshore assets.

Source: Investor Presentation

Going forward, Anadarko expects to grow its hydrocarbon sales volume from the Wattenberg field at a CAGR of 20% in the long run (see figure above). Moreover, with the rising drilling efficiencies as well as the increased number of operated rigs and improving midstream infrastructure, I believe the company will be able to achieve this target. In addition, the company has been working on doubling its oil takeaway capacity from the Wattenberg field to almost 90,000 barrels of oil per day by the end of 2015. Similarly, by the end of 2016, the company also plans to expand the gas processing capacity from around 400 million cubic feet per day (MMCFD) to over 1,000 MMCFD.

Moreover, In October 2013, Anadarko exchanged certain oil and gas properties in the Wattenberg field with a third party. Under the terms of the transaction, each party exchanged approximately 50,000 net acres. Since October 2013, the transaction increased Anadarko's production by 8,000 barrels of oil equivalent per day (BOE/d) and is expected to drive more than $500 million in cost savings for the company through reduced trucking and water sourcing requirements. Moreover, the deal will allow the company to better leverage its midstream infrastructure in the coming years.

Gulf of Mexico

The company operates six active floating platforms and holds interests in 29 producing fields. It holds an average of 63% working interest in 444 blocks in the Gulf of Mexico. During 2013, the Gulf of Mexico contributed 96 MBOED of sales volume, representing 12 percent of the company's total hydrocarbon. With the addition of Lucius and Heidelberg fields, the company is expected to increase its sales volume. The Lucas field is estimated to contain more than 300 million reserves. The company expects to start production by the second half of 2014.

Similarly, in the Heidelberg field, which is expected to hold approximately 200 - 400 million barrels of oil equivalent, Anadarko holds a 31.5% working interest. The project is expected to come online by mid-2016. Another project that is worth mentioning here is the Shenandoah project. Anadarko holds a 30% operating interest in the project. The Shenandoah project is estimated to have the capacity of around 300 million barrels of oil equivalent. Given the current status of the above mentioned projects, I believe that the company is well positioned to capitalize on its offshore assets in the Gulf of Mexico.

Concluding Remarks

The company has multiple growth projects coming online throughout 2014 and its onshore US production is also well positioned to contribute to total production. This production growth should support the company's dividend payout, reflecting the fact that there is enough room for dividend growth in the future.

To conclude, the production growth prospects mentioned above will be reflected in the higher dividend payments. Therefore, given the arguments above, the company seems to be an attractive investment opportunity for both value and growth investors.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.